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Monday, April 11, 2011

State Bank of India - Short Term & Long Term Prospects

With a recent leadership change in its CMD's post, but with no change in its controversial teaser loan product in home financing, and a renewed interest in growings its retail business, here is a look at SBI's (BSE: 500112, NSE: SBIN) short term and long term prospects for investors:

Recent Strategic Initiatives:

SBI recently concluded a successful bond issue that takes care of the fund requirements. The bank remains bullish on teaser loans in home financing, and seems to have the tacit approval of Finance Ministry, even against the wishes of banking regulator, Reserve Bank of India (RBI). Teaser home loans are expected to be a future money-spinner for SBI, if it doesn’t regress to a sub-prime like scenario. Due to its unique positioning as the bank ‘closest’ to Government of India, SBI has unique access to some incredibly large fund decisions like the recent Employees' Provident Fund Organization's (EPFO) decision to park Rs. 3.5 lakh crore solely with SBI, even if it is for three months.

Strengths:

SBI is 330% larger than Punjab National Bank (BSE: 532461, NSE: PNB), the nearest public sector competitor by income; and 275% larger than nearest private sector peer, ICICI Bank (BSE: 532174, NSE: ICICIBANK). Not only can’t both of them play catch-up in the coming few years, but size-wise things are getting better for SBI due to the upcoming mergers with SBI Group banks like State Bank of Mysore (BSE: 532200, NSE: MYSOREBANK), State Bank of Bikaner & Jaipur (BSE: 501061, NSE: SBBJ), & State Bank of Travancore (BSE: 532191, NSE: SBT). The dominance in income is also on a comparable asset base. SBI has shown the capability for leading other PSBs in innovative products, and lately even a brand of defiance to regulators when it comes to pushing things their way. State Bank Group has access to some of the lowest cost Current Account / Savings Account (CASA) funds in the country that protects margins. Reputation wise and trust wise, SBI is quite popular among customers.

Weaknesses:

Despite leadership in income and CASA, SBI lags in profitability compared with a few other PSBs, and many private sector banks. This might hint at systemic inefficiencies. SBI's recent rows with RBI regarding teaser loans and provisioning can invite unnecessary wrath and regulation. SBI has been very sluggish compared with private sector peers like ICICI Bank when it comes to offering a bouquet of services. State Bank of India had witnessed a significant negative cash flow last year. SBI's Return on Equity (RoE) is below 14, unlike many outperforming peers in both public and private sector. Free reserves per share is not impressive at less than 40% of the book value.

Outlook:

The recent correction has shaved off almost Rs. 800 from SBI's share price and made the scrip safer than before. But it is not the safest bet among PSBs, as SBI still trades at a significant premium to its peers with a P/E of over 17 and P/BV of 2.70 times. For a while, that is during the last Bank Nifty rally, it seemed as though SBI would be re-rated to reach private sector valuations. But this was not to be, and the scrip took its investors through a painful correction, which seems to have not found its bottom still. But if Bank Nifty improves in the coming months, expect SBI to join in, but not outperform. Even taking out its 52-Week High of 3515 again seems to be a task for SBI.

Investment Grade:

If both Foreign Institutional Investments (FII) inflow and credit growth outperforms, SBI can perform as good as a bank fixed deposit, that is deliver an annual return of around 10%. Has the potential to double in the long run - 3 to 5 years or more - if and only if the mergers with all the three group banks occur. Chances are more for this to get delayed, and SBI delivering only an FD type return in good markets, and correcting significantly in adverse markets and slow credit growth conditions.